IRISH people are saving more than ever, with bank deposits reaching a high of over €160 billion at the start of the year.
However, savers in Ireland are earning some of the lowest returns in the EU, with many people missing out on potential interest income due to persistently poor rates on both instant-access and fixed-term deposits.
Recent analysis by Raisin Bank highlights just how uncompetitive Ireland’s savings landscape is: the average return on overnight deposit accounts in Ireland over the past year was just 0.13 percent.
German savers, by comparison, earned an average of 0.55 percent.
On term deposits, which offer higher interest in exchange for locking away funds, Irish savers still fall behind other European countries, receiving an average return of 2.44 percent, compared to 3.06 percent in Italy.
Over a ten-year period, the analysis shows the divide only grows starker.
Irish people saw the lowest year-on-year returns of all countries surveyed in the report, averaging just 0.62 percent.
The Central Bank estimates that Irish saving account holders missed out on €800 million in deposit interest in the last year alone.
A large part of the problem lies in the structure of Ireland’s banking sector.
There are only a few banks to choose from and relatively little customer switching between institutions or account types.
This means banks have little reason to offer competitive rates.
Many people continue to keep their money in overnight accounts out of habit or a sense of security, despite better options being available elsewhere.
According to Raisin, around nine out of every ten euro saved in Ireland is kept in these low-yield accounts.
This cautious approach could stem from the global financial crisis.
At the time bank competed for deposits, and savers were rewarded with attractive returns.
However, since the crash, as the European Central Bank maintained a policy of ultra-low and even negative interest rates, the incentive to move money all but vanished.
A rise in inflation since the global pandemic and geopolitical problems has also complicated matters.
Even when interest is earned, it often fails to outpace inflation, resulting in a negative real return.
The value of money sitting in a savings account may be quietly eroding over time.
Ireland’s 33 percent Deposit Interest Retention Tax (DIRT) worsens the picture, reducing the net return on interest earned.
Unlike in Britain, Irish savers do not have access to tax-free options like ISAs, limiting their ability to build wealth in a tax-efficient way.
The situation is especially difficult for younger people.
High housing costs and rising living expenses mean that many can only save for short-term goals, like a deposit for a home, leaving little flexibility to seek out higher-yield, longer-term options.
Meanwhile, older savers, who have less incentive to change, are leaving billions in low-return accounts.
Banks have long relied on this to maintain their deposit base without offering competitive rates.
Although fintech startups such as Revolut and N26 have entered the market with more appealing features and interest rates, concerns around fraud, customer service and digital access still intimidate some people.
Traditional banks have also become targets for sophisticated scams, making some savers wary of exploring unfamiliar options.
Credit unions also face deposit limits and regulatory hurdles that make it difficult for them to offer meaningful competition.
Government savings products, like prize bonds, remain popular with a segment of savers, largely due to perceptions of safety.
However, their real-world performance is mixed.
In 2023, prize bond sales dropped significantly while redemptions rose, and critics argue that the lack of guaranteed returns and declining inflation-adjusted value make them an outdated choice.
Despite strong savings among the Irish public, the system in which they operate does little to reward it.
High deposit levels are masking deeper inefficiencies in the market, low competition, insufficient innovation, poor real returns and an over-reliance on traditional financial habits.
In 'Low and Slow: Irish household deposit preferences and their response to the changing interest rate environment', Economist Tiernan Heffernan notes that although the European Central Bank's (ECB) reference interest rate hikes since July 2022 “did attract Irish households to place their deposits in longer-term deposit accounts to some extent, they still fall far behind the euro area average in this respect.”
Irish households now hold the highest proportion of their deposits in overnight accounts of any euro area country.
This cautious approach has come at a significant cost.
While higher interest rates have slowly begun to influence saving behaviours, the shift has been modest.
For much of the past decade, interest rates were so low that there was little difference between overnight and term deposit returns, offering households little incentive to lock away their savings.
Although Irish term deposit rates historically trailed those in the euro area, “this is not the case in the most recent data,” yet the habit persists.
Part of the explanation may lie in Irish households’ gradual response to change.
“Irish households have been slower than their euro area counterparts to respond to rising term deposit rates,” Heffernan writes.
However, some savers have started turning to neobanks, attracted by “higher rates on deposits and additional online services”.
With inflation eating into savings and banks prioritising profitability over customer value, the current model benefits banks far more than ordinary people.
See More: Banking, Central Bank Of Ireland, DIRT, ECB, Saving
